THE JTCIT (OSD) RG 3(3), MUMBAI V. M/S. VIDEOCON INDUSTRIES LTD, MUMBAI

ITA 7252/MUM/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49063 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 03-05-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 05-12-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ASHIMA GUPTA SR
• Assessee Lawyers: SHAILESH S SHAH
• Keywords: Capital asset; Business income; Bad and doubtful debts; Assessment record
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI. BEFORE SHRI R.V.EASWAR, PRESIDENT AND SHRI R.K.PANDA, ACCOUNTANT MEMBER I.T.A. NO.7252/MUM/2007 (ASSESSMENT YEAR : 2003-04) THE JOINT COMMISSIONER OF INCOME TAX(OSD), RANGE-3(3), 609, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400 020. VS. M/S. VIDEOCON INDUSTRIES LTD., 17 TH FLOOR, C WING, MITTAL COURT, NARIMAN POINT, MUMBAI-400 021. PAN: AABCV4012H (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. ASHIMA GUPTA, SR. AR RESPONDENT BY : SHRI SHAILESH S.SHAH O R D E R PER R.V.EASWAR, PRESIDENT: THIS IS AN APPEAL BY THE REVENUE AND THE ONLY EFFECTIVE GROUND IS THAT THE CIT(A) ER RED IN ALLOWING THE CLAIM FOR DEDUCTION OF BAD DEBTS UNDER SECTION 36(1)(VII)OF THE INCOME TAX ACT. 2. THE APPEAL ARISES THIS WAY. THE ASSESSEE IS A PU BLIC LIMITED COMPANY ENGAGED IN THE BUSINESS OF LEASING AND PROVIDING SERVICES. THE ASSESSMENT FOR THE YEAR UND ER APPEAL WAS ORIGINALLY COMPLETED UNDER SECTION 143(3) ON 11 .03.2005 BUT IT WAS SET ASIDE BY THE COMMISSIONER UNDER SECT ION 263 OF THE ACT WITH DIRECTIONS TO THE ASSESSING OFFICER TO REDO THE SAME AFRESH. A COPY OF THE ORDER OF THE CIT DATED 21.12. 2005 PASSED UNDER SECTION 263 IS PLACED AT PAGES 51 TO 53 OF TH E PAPER BOOK, FROM WHICH IT IS SEEN THAT PROCEEDINGS WERE TAKEN B Y THE CIT ON THE GROUND THAT THE CLAIM OF BAD DEBTS AMOUNTING TO RS.95 LAKHS DUE FROM M/S. POTLURRI LEASE & HIRING PURCHAS E PVT. LTD. WAS WRONGLY ALLOWED IN THE ASSESSMENT MADE ON 11.03 .2005 AND THAT THE ASSESSING OFFICER OUGHT TO HAVE MADE P ROPER ITA NO.7252/MUM/07 2 ENQUIRIES INTO THE ASSESSEES CLAIM. THE COMMISSION ER OBSERVED THAT THE ASSESSEE HELD SHARES OF M/S. SMS PHARMACEU TICALS LTD. WHICH WERE SOLD TO M/S.POTLURRI LEASE & HIRING PURCHASE PVT. LTD. FOR RS.3,37,50,000/- AND OUT OF THE AGREE D SALE PRICE A SUM OF RS.95 LAKHS COULD NOT BE RECOVERED BY THE AS SESSEE DUE TO THE BAD FINANCIAL POSITION OF THE PURCHASER OF T HE SHARES AND THAT THE ASSESSEES CLAIM THAT THE UNRECOVERED AMOU NT WAS ALLOWABLE AS BAD DEBT WAS NOT PROPERLY EXAMINED BY THE ASSESSING OFFICER IN THE LIGHT OF SECTION 36(1)(VII ) OF THE ACT. ULTIMATELY THE ASSESSMENT ORDER WAS SET ASIDE ON TH E GROUND THAT IT WAS ERRONEOUS AND PREJUDICIAL TO THE INTERE ST OF THE REVENUE AND THE ASSESSING OFFICER WAS DIRECTED TO R EFRAME THE ASSESSMENT AFTER GIVING ADEQUATE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. 3. AGAINST THE ORDER PASSED BY THE CIT UNDER SECTIO N 263, THE ASSESSEE FILED AN APPEAL TO THE TRIBUNAL IN ITA NO.1233/MUM/2006. THIS APPEAL WAS DISPOSED OF BY TH E TRIBUNAL BY ORDER DATED 24.06.2008. A PERUSAL THERE OF SHOWS THAT THE TRIBUNAL TOOK THE VIEW THAT IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER HAD NO OCCASION TO EXAMINE THE ISSUE OF BAD DEBT IN DETAIL AND THER EFORE THE ASSESSING OFFICER HAD NO OCCASION TO FORM AN OPINIO N AS TO THE ALLOWABILITY OF THE SAME. IT WOULD APPEAR THAT BEFO RE THE TRIBUNAL THE ASSESSEE PUT FORTH AN ARGUMENT THAT TH E AMOUNT WRITTEN OFF AS BAD DEBT SHOULD BE ALLOWED ALTERNATI VELY AS BUSINESS LOSS. THE TRIBUNAL IN PARAGRAPH 9 OF ITS ORDER OPINED THAT THOUGH IT MAY BE TRUE THAT THE ASSESSEE WAS IN THE BUSINESS OF INVESTMENT IN SHARES AS ALSO TRADING IN SHARES BUT ITS CONDUCT AS FAR AS THE SALE OF SHARES TO M/S. PO TLURRI LEASE & HIRING PURCHASE PVT. LTD. IS CONCERNED, IT WAS TRE ATED IN THE BOOKS OF ACCOUNT AS INVESTMENT AND LOSS ARISING FRO M THE SALE OF SHARES WAS TREATED UNDER THE HEAD LONG TERM CAPITA L LOSS AND ITA NO.7252/MUM/07 3 SET OFF AGAINST THE LONG TERM CAPITAL GAINS IN THE LATER YEARS. AFTER MAKING THESE OBSERVATIONS THE TRIBUNAL EVENTU ALLY HELD THAT THE CIT WAS CORRECT IN ACQUIRING JURISDICTION TO REVISE THE ASSESSMENT ORDER UNDER SECTION 263 OF THE ACT. 4. WE MAY ALSO NOTICE ONE MORE ASPECT OF THE MATTER . IN THE SAME PARAGRAPH, THE TRIBUNAL IN ITS ORDER ALSO OBSE RVED THAT PRIMA-FACIE THE CLAIM OF BAD DEBT CANNOT BE CONSIDE RED UNDER SECTION 36(1)(VII) AND FROM THE FACTS ON RECORD AN D SUBMISSIONS MADE IT CAN BE CONCLUDED THAT THE ASSESSEE HAS WRO NGLY CLAIMED THE AMOUNT NOT RECOVERABLE FROM M/S. POTLUR RI LEASE & HIRING PURCHASE PVT. LTD. AS BAD DEBT UNDER THE SEC TION 36(1)(VII) AND AS ALLOWABLE DEDUCTION UNDER THE HEA D BUSINESS AND THE ASSESSING OFFICER ALLOWED THE SAME WITHOUT EXAMINING THE FACTS ON RECORD. HAVING MADE THESE OBSERVATIO NS THE TRIBUNAL IN PARA 11 OF ITS ORDER HASTENED TO ADD TH AT THESE OBSERVATIONS ARE LIMITED TO THE ISSUE OF ACQUIRING JURISDICTION UNDER SECTION 263 AND ARE IN NO WAY RELATABLE TO TH E ALLOWABILITY OR NON-ALLOWABILITY OF THE CLAIM OF BAD DEBT WHICH MAY COME UP FOR CONSIDERATION SEPARATELY. 5. IN THE ASSESSMENT ORDER PASSED ON 17.03.2006 UND ER SECTION 143(3) READ WITH SECTION 263 OF THE ACT, TH E ASSESSING OFFICER EXAMINED THE ASSESSEES CLAIM OF BAD DEBT O F RS.95 LAKHS. AFTER CONSIDERING THE DETAILED REPLY FILED B Y THE ASSESSEE, THE ASSESSING OFFICER REJECTED THE CLAIM AS UNDER:- 4.3 I HAVE PERUSED THE ARGUMENTS OF THE ASSESSEE COMPANY AND AM NOT IN AGREEMENT WITH THE SAME. IT IS SEEN ON PERUSAL OF THE ASSESSMENT RECORDS OF ASSESSMENT YEAR 1999-2000 THAT THE LOSS ON SALE OF SHARES ON SMS PHARMACEUTICALS HAS BEEN DECLARED AS LONG TERM CAPITAL LOSS. THIS SHOWS THAT THE TRANSACTION IN RESPECT OF THE PURCHASE AND SALE OF SHARES OF SMS PHARMACEUTICALS ARE NOTHING BUT TRANSFER OF CAPITAL ASSET AND NOT PART OF THE BUSINESS OF THE ASSESSEE COMPANY. THIS FACT IS EVIDENT FROM THE ASSESSMENT RECORDS OF PREVIOUS ITA NO.7252/MUM/07 4 ASSESSMENT YEARS WHEREIN THE SHARES HAVE BEEN SHOWN AS INVESTMENTS. IN VIEW OF THE ABOVE, THE CLAIM OF THE ASSESSEE COMPANY THAT THE SAID LOSS OF RS.95,00,000/- SHOULD BE ALLOWED AS A BUSINESS LOSS AND THEREBY WRITING IT OFF AS BAD DEBT UNDER SECTION 36(1)(VII) OF THE INCOME TAX ACT CANNOT BE ALLOWABLE AS THE CONDITIONS LAID DOWN BY SECTION 36(1)(VII) OF THE INCOME TAX ACT, 1961 ARE NOT SATISFIED BY THE ASSESSEE COMPANY. 4.4 HENCE, THE AFORESAID CLAIM OF BAD DEBTS OF RS.95,00,000/- IS DISALLOWED AS BUSINESS LOSS AND TREATED AS CAPITAL LOSS OF THE EARLIER YEAR AND ARE ALLOWED TO BE C/F AS PER LAW. 6. ON APPEAL THE CIT(A) RECORDED THE FOLLOWING FIND INGS:- A) MERELY BECAUSE THE SHARES OF SMS PHARMACEUTICALS LTD. WERE SHOWN IN THE ASSESSEES BALANCE SHEET AS NON-T RADE INVESTMENTS, IT CANNOT BE SAID THAT THEY WERE NOT H ELD FOR TRADING PURPOSES. THE NOMENCLATURE DESCRIBED ONLY T HE TYPE OF INVESTMENTS MADE VIS-A-VIS OTHER BUSINESS ACTIVITIE S OF THE COMPANY. B) THE ASSESSEE IS ENGAGED IN INVESTMENT ACTIVITIES WHICH IS IN THE NATURE OF FINANCING BUSINESS AND THE PROFIT OR LOSS ARISING FROM SUCH ACTIVITIES IS IN THE NATURE OF BUSINESS P ROFIT OR LOSS. IN FACT FOR THE ASSESSMENT YEARS 1995-96 TO 1998-99 PR OFIT ON SALE OF SUCH INVESTMENTS HAVE BEEN SHOWN AS BUSINESS PRO FITS AND ALSO ASSESSED AS SUCH. C) THOUGH THE SHARES WERE PURCHASED IN THE FINANCIA L YEAR 1996-97, THE ASSESSEE DID NOT ASK FOR THE BENEFIT O F INDEXATION OF COST WHILE COMPUTING THE LONG TERM CAPITAL GAIN OR LOSS ON THE SALE OF THE SHARES AND THE DIFFERENCE BETWEEN THE S ALE PROCEEDS AND THE PURCHASE PRICE WAS CLAIMED AS CAPITAL LOSS FOR THE YEAR ENDED 31.03.1999. THIS SHOWS THAT THE SHARES WERE T REATED AS BUSINESS ASSET AND NOT AS CAPITAL ASSET. D) THE ASSESSING OFFICER HAD ENQUIRED INTO THE CLAI M OF BAD DEBTS IN DETAIL AND THE ASSESSEE HAD ALSO SUBMITTED ALL THE FACTS IN RELATION THERETO IN ITS LETTERS DATED 10.02.2005 , 14.02.2005 AND 21.02.2005. THE ASSESSING OFFICER IN THE ORIGI NAL ITA NO.7252/MUM/07 5 ASSESSMENT PROCEEDINGS HAD ACCEPTED THE ASSESSEES CLAIM OF BAD DEBT ONLY AFTER EXAMINING THE FACTS PLACED ON R ECORD. E) THUS THE TRANSACTION WAS AN ORDINARY BUSINESS TRANSACTION CARRIED OUT IN THE COURSE OF BUSINESS O F FINANCING AND INVESTMENTS AND THE SALE PROCEEDS RECEIVABLE FR OM M/S.POTLURRI LEASE & HIRING PURCHASE PVT. LTD. WAS A BUSINESS DEBT AND SINCE THE SAME COULD NOT BE RECOVERED AND WAS WRITTEN OFF AS BAD DEBT IN THE ASSESSEES BOOKS, IT IS ALLOWABLE AS BAD DEBT UNDER SECTION 36(1)(VII) OF THE ACT. ON THE BASIS OF THE ABOVE FINDINGS, THE CIT(A) ALLO WED THE CLAIM OF THE DEBT. 7. THE REVENUE IS AGGRIEVED BY THE AFORESAID DECISI ON OF THE CIT(A) AND HAS COME IN APPEAL BEFORE THE TRIBUNAL. IN OUR OPINION, THEIR GRIEVANCE IS FULLY JUSTIFIED. THERE IS NO DISPUTE THAT THE SHARES OF M/S. SMS PHARMACEUTICALS LTD. WE RE SHOWN UNDER THE HEAD INVESTMENTS NON-TRADE IN SCHEDUL E 5 TO THE BALANCE SHEET. EVEN IF IT IS ASSUMED THAT THIS IS O NLY TO DESCRIBE THE TYPE OF INVESTMENTS MADE VIS-A-VIS THE OTHER BU SINESS ACTIVITIES OF THE COMPANY AND IT DOES NOT MEAN THA T THESE SHARES WERE NOT HELD FOR TRADING AS HELD BY THE CIT (A), IT CANNOT BE OVERLOOKED THAT THE ASSESSEE HAD DECLARED THE LO SS ARISING ON THE SALE OF THE SHARES UNDER THE HEAD CAPITAL GAIN S IN THE RETURN FILED IN THE ASSESSMENT YEAR 1999-2000. A CO PY OF THE RETURN AND THE STATEMENTS ACCOMPANYING THE RETURN IS FILED AS PART OF THE PAPER BOOK. THE SHARES OF M/S. SMS PHARMACEUTICALS LTD. ARE SHOWN UNDER THE HEAD LONG TERM INVESTMENTS [NON-TRADE] IN THE BALANCE SHEET. THE SHARES WERE SOLD TO M/S. M/S.POTLURRI LEASE & HIRING PURCHASE P VT. LTD. ON 10.06.1998 FOR AN AGREED PRICE OF RS.3,37,50,000/-. IN THE RETURN FILED FOR THE ASSESSMENT YEAR 1999-2000, THE LOSS ON SALE OF INVESTMENT WAS SHOWN UNDER THE HEAD CAPITAL GAIN S AT RS.7,19,81,622/- WHICH INCLUDED THE LOSS OF RS.1,96 ,59,041/- ITA NO.7252/MUM/07 6 ON THE SALE OF SHARES OF M/S. SMS PHARMACEUTICALS L TD. THUS IT IS UNDISPUTED THAT THE LOSS ON THE SALE OF SHARES W ERE SHOWN AND ASSESSED AS LONG TERM CAPITAL LOSS. THE NET LON G TERM CAPITAL LOSS DECLARED FOR THE ASSESSMENT YEAR 1999-2000 WAS CARRIED FORWARD TO THE SUBSEQUENT YEARS AND IT WAS SET OFF PARTLY IN THE ASSESSMENT YEAR 2000-01 AND PARTLY IN THE ASSESSMEN T YEAR 2003-04 AGAINST THE LONG TERM CAPITAL GAINS FOR THE SE YEARS. THUS DESPITE CLAIMING BEFORE THE CIT(A) WHICH CLAIM HAS ALSO BEEN ACCEPTED BY HIM, THAT THE FACT THAT THE SHARES WERE SHOWN AS LONG TERM INVESTMENTS (NON-TRADE) IN THE BALANCE SHEET DOES NOT MEAN THAT THEY WERE NOT HELD FOR THE PURPOSE OF THE BUSINESS IN SHARES SAID TO HAVE BEEN CARRIED ON BY THE ASSESSEE, THE ASSESSEES CONDUCT IN CLAIMING THE LOSS ON THE SALE OF THE SAME SHARES AS CAPITAL LOSS IN THE RETURN FILED FOR THE ASSESSMENT YEAR 1999-2000 CLEARLY INDICATES THAT TH E CLAIM IS UNTENABLE AND IT SHOULD NOT HAVE BEEN ACCEPTED BY T HE CIT(A). THE ASSESSEE ALSO CLAIMED TO CARRY FORWARD THE LONG TERM CAPITAL LOSS, WHICH INCLUDED THE LOSS ON THE SALE OF SHARES OF M/S. SMS PHARMACEUTICALS LTD. AND SET IT OFF AGAINST THE LON G TERM CAPITAL GAINS FOR THE SUBSEQUENT ASSESSMENT YEARS. HAVING T HUS CLAIMED THAT THE LOSS ON THE SALE OF SHARES WAS A C APITAL LOSS (LONG TERM), THE ASSESSEE IS NOW TAKING A COMPLETE LY CONTRADICTORY POSITION BY CLAIMING THAT THE UNRECOV ERED AMOUNT OF RS.95 LAKHS FROM THE SALE PROCEEDS DUE FROM M/S .POTLURRI LEASE & HIRING PURCHASE PVT. LTD. IS A BAD DEBT. IT IS INDEED SURPRISING THAT THE ASSESSEE HAS CHOSEN TO MAKE SUC H A CLAIM WHEN ONE OF THE BASIC CONDITIONS FOR ALLOWANCE OF B AD DEBT HAS NOT BEEN SATISFIED BY HIM. WE ARE REFERRING TO SECT ION 36(2)(I) OF THE ACT WHICH REQUIRES THAT THE AMOUNT CLAIMED AS B AD DEBT SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING TH E BUSINESS INCOME OF THE ASSESSEE IN ANY OF THE EARLIER YEARS OR IN THE YEAR IN WHICH THE BAD DEBT IS CLAIMED AS A DEDUCTION. IN THE COURSE OF THE ARGUMENTS BEFORE US WE SPECIFICALLY ASKED TH E LEARNED ITA NO.7252/MUM/07 7 REPRESENTATIVE FOR THE ASSESSEE TO TELL US WHETHER THIS CONDITION IS SATISFIED IN THE PRESENT CASE. HE STATED IN RESP ONSE THAT THE CONDITION HAS NOT BEEN SATISFIED. IF THIS BASIC CON DITION IS NOT SATISFIED THERE IS NO WAY THE CLAIM CAN BE ALLOWED AS A BAD DEBT QUITE APART FROM THE FACT THAT IT CANNOT BE CLAIMED AS A TRADE DEBT BECAUSE THE LOSS ON SALE OF THE SHARES WAS SHO WN AS A LOSS ON SALE OF INVESTMENT AND CONSEQUENTLY A LONG TERM CAPITAL LOSS. IF THE SHARES WERE HELD AS LONG TERM INVESTME NTS AND DESCRIBED AS NON-TRADE INVESTMENTS, WE FAIL TO SEE HOW THE SAME SHARES CAN BE CLAIMED TO BE STOCK-IN-TRADE OR A BUS INESS ASSET. THE CONDUCT OF THE ASSESSEE IN EXHIBITING THE SHARE S AS LONG TERM INVESTMENTS (NON-TRADE) IN THE BALANCE SHEET A ND ITS CONSISTENT CLAIM THAT THE LOSS ON THE SALE OF SHARE S REPRESENTED LONG TERM CAPITAL LOSS TO BE SET OFF AGAINST THE LO NG TERM CAPITAL GAINS EXPOSE THE FALLACY IN THE ASSESSEES STAND BE FORE US AND BEFORE THE ASSESSING OFFICER IN THE SECOND ROUND OF PROCEEDINGS TAKEN UNDER SECTION 143(3) READ WITH SECTION 263. T HE CIT(A), WITH RESPECT, DOES NOT APPEAR TO HAVE APPRECIATED T HE GRAVITY OF THE FACTS AND THE CONTRADICTORY STAND TAKEN BY THE ASSESSEE. HE WAS ALSO NOT JUSTIFIED IN ACCEPTING THE ASSESSEES CLAIM THAT BECAUSE IT DID NOT CLAIM THE BENEFIT OF COST INDEXA TION WHILE COMPUTING THE LONG TERM CAPITAL LOSS ON THE SALE OF SHARES, IT SHOWS THAT THE ASSESSEE TREATED THE SALE OF SHARES AS SALE OF BUSINESS ASSET. THERE IS NO BASIS FOR THIS CONCLUS ION. IT MAY BE AN OMISSION TO CLAIM THE PARTICULAR BENEFIT AVAILAB LE TO THE ASSESSEE WHILE COMPUTING THE CAPITAL GAINS AND MERE LY FROM THE OMISSION, THE CIT(A) WAS NOT JUSTIFIED IN INFERRING THAT THE ENTIRE NATURE OF THE SHARES CHANGED FROM A CAPITAL ASSET/I NVESTMENT TO BUSINESS ASSET/STOCK-IN-TRADE. THE CIT(A) ALSO APP EARS TO HAVE LOST SIGHT OF THE FACT THAT THE CONDITION PRESCRIBE D BY SECTION 36(2)(J) OF THE ACT WAS NOT SATISFIED IN THE PRESEN T CASE. ITA NO.7252/MUM/07 8 8. FOR THE ABOVE REASONS, WE REVERSE THE FINDINGS A ND THE DECISION OF THE CIT(A) AND RESTORE THE DISALLOWANCE OF RS.95 LAKHS MADE BY THE ASSESSING OFFICER. THE ASSESSEE S HALL PAY COSTS OF RS.5,000/- (RUPEES FIVE THOUSAND ONLY) TO THE INCOME- TAX DEPARTMENT. THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 20 TH DAY OF MAY , 2011. SD/- ( R.K. PANDA ) SD/- ( R.V.EASWAR ) ACCOUNTANT MEM BER PRESIDENT MUMBAI, DATED 20 TH MAY, 2011. SOMU COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-3, MUMBAI. 4. THE CIT(A)-XXXII, MUMBAI 5. THE DR F BENCH /TRUE COPY/ BY ORDE R ASSTT. REGISTRAR, I.T.A.T, MUMBAI